Tuesday, 7 February, 2023

Coping With Liquidity Crisis

Uttam Maharjan

Commercial banks are in a liquidity crisis now. The banking sector that is plagued by the COVID-19 pandemic is gradually recovering from the impact with a rise in economic activity. Now, the COVID-19 infection rate is going down and more and more people are getting vaccinated with the arrival of COVID-19 vaccines from various countries and through the COVAX facility. This has instilled a sense of confidence in businessmen, traders and industrialists. As such, demand for loans has surged drastically. On the other hand, deposit mobilisation is moving slowly.

The total loan portfolio in the banking sector till Kartik 5 (October 22) was Rs. 3,998 billion, while the total deposits were Rs. 4,249 billion. Within less than a week, the deposits had fallen by Rs. 20 billion (the total deposits at the end of Aswin stood at Rs. 4,269 billion.). During the first three months of the current fiscal year, banks disbursed loans amounting to Rs. 262 billion, while they collected deposits of Rs. 54 billion only. This indicates that the credit sector has been improving for the past few years but the deposit sector has not been able to catch up with the credit sector.

Declining remittances
In recent times, remittances have also been plunging. Owing to the COVID-19 pandemic, many migrant Nepalis lost their jobs abroad. They had to come back to Nepal. As there are still problems in many destination countries, the inflow of remittances has taken a knock. Foreign employment in Malaysia and Korea, for example, has not opened up yet. Also, the number of people going to other countries for employment is also low. As per the data of Nepal Rastra Bank, the total remittances for the first two months of this fiscal year were Rs. 155.37 billion, which was lower than during the corresponding period of last fiscal year by 6.3 per cent.

The BOP deficit during the first two months of this fiscal year was Rs. 83.41 billion. There was a BOP surplus of Rs. 67.63 billion during the corresponding period of last fiscal year. When an outflow of money exceeds an inflow of money, such a situation crops up. Refinancing, remittances and BOP surpluses are good sources of liquidity. When these factors are disturbed, a liquidity crisis may emerge. Experts are of the opinion that today’s liquidity crisis may have arisen owing to these factors combined with low government spending.

With an improvement in the COVID-19 scenario, economic activity has increased in the country, resulting in a surge in imports. So there is a high demand for loans to sustain imports. The government collects customs revenue from such imports, which ultimately ends up in government coffers. But capital budget spending is not satisfactory. The money locked in government coffers should come out to make the economy vibrant.
Nepal Rastra Bank has increased the CCD ratio of banks from 80 per cent to 85 per cent to ease liquidity. Even this amendment to the CCD ratio has not been able to arrest the liquidity crisis now looming large in the banking sector. When demand for loans increases, deposits have to be increased accordingly. When deposit mobilisation lags behind loan disbursement, the interest needs to be increased to lure depositors because deposits do not come to banks on a platter. This is what is happening now.

At the beginning of Kartik, many banks increased the rates of interest on deposits, going as high as 11.10 per cent per annum (on the part of NIC Asia). When the rates of interest on deposits are hiked, lending rates also go up. This startled businessmen. So they lobbied with Nepal Rastra Bank for a lowering of interest rates. As a result, Nepal Rastra Bank immediately directed banks not to increase the rate of interest on deposits by more than ten per cent vis-à-vis the previous month. This move on the part of Nepal Rastra Bank has confined the deposit interest rates of all banks to a single digit. However, if the liquidity crisis persists, banks may raise the rates of interest on deposits next month.

Positive omens
Nepal Rastra Bank has been releasing money into the banking sector to get rid of the liquidity crunch through instruments like repo. Banks are also availing themselves of interbank lending and the standing liquidity facility (SLF) provided by Nepal Rastra Bank to cope with the liquidity crisis. Nepal Rastra Bank officials say that there is more than Rs. 40 billion liquidity in the banking sector.

The economy of the country has been battered by the COVID-19 pandemic. Economic recovery is the priority of the government, too. For this, investments in the business sector need to be jacked up. The economy is also showing positive omens. To bring the economy back on track, the banking and financial sectors needs a leg-up. Nepal Rastra Bank and the Ministry of Finance should play a proactive role in extirpating the liquidity crisis in the banking sector. The liquidity crisis crops up time and again in the banking sector. One of the contributory factors to the crisis is low government spending. Increasing government spending will, on the one hand, accelerate development activities, while on the other it will make the banking and financial sector vibrant. So the government should pay heed to this.

(Former banker, Maharjan has been regularly writing on contemporary issues for this daily since 2000. uttam.maharjan1964@gmail.com)